Increased procurement efficiency through better collaboration between the CPO and the CFO

We’re pleased to feature a guest post from Olivier Chalon, Programme Lead at Xchanging Procurement Services. He and Lance Younger will be presenting on this topic at ProcureCon this week in Amsterdam.

Xchanging Procurement Services (XPS) has recently conducted a survey of CPOs and Heads of procurement from across various industries to explore the relationship between CPOs and CFOs, and their respective functions.   The survey was conducted with the support of Lance Younger, who has occupied both CPO and CFO positions at Goldman Sachs.

The objective of this project was to better understand the disconnect between the two roles, which we noticed in some of our existing and prospective clients. This disconnect is particularly surprising when taking into account that most Procurement functions report directly to the finance department, especially in the Indirect Procurement arena. This makes it important for the two functions to be closely aligned.

Here we set out some of the areas we covered and our key findings.

Building partnerships

The number of respondents who believe Procurement and Finance work as partners is low, at only 28%. Most of these respondents believe the main role of Finance relates to transactional, accounting and approval activities. However, around two thirds identify areas such as planning, budgeting, forecasting and collaboration on the improvement of general business performance as areas where CPOs and CFOs should work together.

One area of possible contradiction raised by the survey is in relation to the use of IT to establish a link between Procurement and Finance. Only 40% of CPOs feel that their IT systems are mature enough, while at the same time 72% of say that their purchasing performance is automatically traced to finance data such as bottom line results.

Finally, when looking at the areas on which CPOs intend to focus on in the near future (eg. Business transformation and alignment, Cost savings, Compliance), the role that Finance could have in helping Procurement to achieve these goals is obvious.

KPIs

When asking CPOs to rank their Procurement KPIs in terms of importance, absolute cost savings is the most commonly used KPI (84%). Only a few companies measure the ROI of their Procurement function (30%), and even fewer of them use KPIs which are dynamically linked to these companies’ actual sales turnovers.

CPOs are aware of the link between their performance and the company bottom line results. However, they don’t always fully value the impact of some elements of their performance (eg compliance management or demand management) to these results. It is also apparent that CPO KPIs should be more strongly aligned to their company’s financial goals (e.g. COGS, Cash, Margin, EBITDA, EPS) since Procurement has an impact on all of these goals.

Skills

Most CPOs consider that their teams have good skills in P2P and contracting & sourcing, as well as good general skills to execute their day to day procurement jobs. However, far less of them mention skills such as Supplier Relationship Management (18%) or other advanced skills, such as value engineering (16%), as part of their core competencies, despite most CPOs considering these skills to be essential to their procurement function.

In summary, the 5 key lessons that we have learned from this survey are:

  • The measurement of Procurement performance should be more strongly linked to the company financial goals
  • The impact of Purchasing performance on the bottom line needs to be more widely understood
  • CPOs see their role (in theory) as including a focus on Supplier Relationship Management, but few of their teams actually do it
  • Finance can help Procurement achieve its goals
  • Procurement has made huge efforts to get aligned with the business and its suppliers, but needs now to work on its relationship with Finance

Olivier Chalon, Programme Lead at Xchanging Procurement Services, will be presenting the full findings of his research at ProcureCon on 6 November at 16.15 with Lance Younger.

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